Читать книгу The Incomplete Currency - Marcello Minenna - Страница 7

This refined analysis on the European Monetary Union certainly cannot put an end to the controversies that inflame endless discussion on this big political and economic innovation. Nevertheless, this book has the merit to frame the problems not only in a perspective that is scientifically rigorous, but with an eye that is able to analyse all the consequences on the European and global financial systems. The “Incomplete Currency” is born and grows in an historical period during which the financial institutions and their activities are not only a support for the real economy but have become themselves an end.

Making money is the mantra that drives the behaviour of financial operations and maximises the market's efficiency. At the same time–in a completely impersonal mode–it encourages speculation and profit seeking from both good and bad news. This emerging phenomenon radically changes the equilibrium of power relations across the entire planet; moreover, as it emerges from the most recent analyses, it presents itself as a determining factor that governs the increasing disparities in wealth distribution.

As introductory topics, the book provides the reader with the tools of the trade. Key concepts–such as those of interest rate risk, credit risk, sovereign yield curve, public debt, inflation, interbank market, collateral, credit derivatives and arbitrage–are carefully explained, laying down the premises to the forthcoming analyses.

The salient features of the monetary policy in the era of the single currency are also presented: the European Central Bank pursues a 2 % target in terms of average inflation and is subject to the explicit prohibition of monetising the public debt of any member country. Hence, the ECB cannot use the inflation lever to put under control the public debt of the member countries if necessary; it has only blunt weapons to deal with any potential debt crisis in the Euro area, like those that occurred after 2008. The reason for these incomplete powers is simple: some member states (especially Germany) have imposed the prohibition of debt monetisation as a binding condition for their membership in order to exclude possible forms of risk-sharing between the various economies of the Eurozone. Every country must be virtuous and rely only on itself. This is the leitmotif of the European Monetary Union, and one of the main causes of its structural weakness and of many other incompletenesses, such as the lack of adequate fiscal transfers schemes with a stabilising function of the imbalances due to the single currency.

In conjunction with other objectives of the European strategy, we face a union “half completed”, with the weaknesses and the dangers this entails.

This incomplete construction of the Eurozone is illustrated by the fundamental relationships that tie together the main players (banks, governments and the ECB) of the European financial system.

Before the outbreak of the crisis, these connections had worked quite well. The strong endorsement to the success of the single currency, not only in terms of compliance with the Maastricht criteria but also on the political side, had pushed banks to bet on the Euro. Convergence trades enacted by the banks had favoured the alignment of the sovereign yield curves of the different Eurozone countries. At the same time a sort of Europeanisation of the public debts of the same countries had occurred within banks' balance sheets. The belief linking these phenomena was that all the member countries were sharing the same risks and that their economies were moving together.

Since 2008 the discovery of sovereign credit risk and its dangers has reversed the virtuous process that was in place until a short time before. Markets began to realise that the integration between the various member countries was neither as authentic nor as profound as was first thought: structural differences between the states of the Eurozone were still alive and a fixed exchange rates regime between such different realities could create serious imbalances. Moreover, there was no garrison providing for some compulsory mutual aid or, in financial terms, some form of risk-sharing.

Financial operators quickly reacted in order to hedge themselves from the more risky countries and to make profits from such a big reversal of the market sentiment. Banks of the core countries put in place a massive deleveraging in order to reduce their exposures to the peripheral countries. In parallel, banks of the peripheral countries had to absorb the sudden oversupply of bonds issued by their own governments. The combined effect of these conducts has been the progressive nationalisation of the public debt of the countries in difficulty.

Moreover, what until a few years before had been essentially a unique yield curve on the Eurozone's government bonds began to disintegrate, paving the way for the upsurge of the spreads. Several factors contributed to this divergence process: the collateral discrimination that flared up on the interbank market and (for a while) at the ECB too; the spread intermediation set up by banks to make easy profits through the brokerage of bonds issued by different entities and/or traded with different counterparties (e.g. ECB, interbank market, retail investors).

In less than two years, the financial demolition of the Euro area took place. Since the summer of 2011 the five-year probability of a Euro break-up began to show a bull pattern, breaching the 25 % threshold in November 2011 and reaching 32 % in June 2012 when Spain was close to default.

Despite the fact that the member states had a regime of fixed exchange rates with each other, there was the need on financial grounds to express the diversity of the various countries in terms of credit risk and the spread was precisely the expression of such diversity: a perfect shadow currency specific for any country, with the spread differentials corresponding to the floating exchange rate between these currencies.

On the side of the real economy several weaknesses were inherited from the period 2000–2007: significant competitiveness gaps–mainly driven by inflation differentials–had accumulated between the various countries. Peripheral countries (less competitive) had therefore begun to experience trade balance deficits, while the opposite happened to the (more competitive) core countries, especially Germany. But we'll see that the “spreads” have expressed much further than the simple recognition of the competitive gaps shown by the imbalances of the trade flows.

These trade imbalances had a financial counterpart in the dysfunctional trend of the loans disbursed by the German banking system to the banks of the peripheral countries, and in the net balances of the European payments system: Target2. This system is primarily a matter of credit risk and of transferring this risk from the private banking system of a country to its national central bank and, hence, to the whole consortium of the central banks of the Euro area. Analysis of the Target2 net balances shows a very clear picture of the Eurozone at the time of the crisis: on the one hand, the core countries (except France) exhibit positive and increasingTarget2 net balances, where the Bundesbank has the lion's share; on the other hand, the periphery and France exhibit increasingly negative Target2 net balances. The extraordinary size of the German positive Target2 net balance (€500 billion at the height of the crisis) can be explained considering that Germany has implemented a typical vendor financing strategy. Until 2011 the German banking system disbursed huge amounts of credit to the peripheral economies; in parallel, the German current account surplus continued to grow (and the deficit of the peripheral countries to deteriorate) because the periphery used a substantial portion of the credit received to import goods produced by German manufacturing.

The crisis has intervened on these financial and commercial relations, fuelling the gap between the economies of the Eurozone. In the case of the peripheral countries the upsurge of the spreads has compromised the strength of the real economy and its potential for development. In fact, higher spreads result in higher financing costs for the manufacturing industry and, like the inflation differentials, entail competitiveness gaps between the Eurozone countries. In the book, this phenomenon has been dubbed financial inflation or spread-rooted inflation. The burden of higher financial expenses brought many companies out of business or, in the best scenario, to cut the costs of labour. The opposite happened to the German industry that has always been able to raise funds at low costs and sell its production at competitive prices. In this way German manufacturing has consolidated its leadership in Europe, even for goods whose production cycle is mature and there is no competitive advantage in terms of technological progress. Significant advantages of the German manufacturing system are also related to a lower hourly labour cost.

Also with regard to the public finances of the member countries, the spread has accelerated profound and fast divergence processes between centre and periphery. In the case of Portugal, Italy, Ireland, Greece and Spain (the so-called PIIGS) the rising nominal interest rates have been immediately reflected onto an increase in the cost of servicing the public debt. Combined with the mentioned problems on the private sector, this led to a deep recession in PIIGS and to an explosion of the public deficits (to face an increased public spending) which put further pressure on sovereign yields.

In the autumn of 2011 another serious problem arose: the banking systems (especially those of peripheral countries exposed to the speculative attacks of the markets) were running out of cash and could not hold out much longer. In this frantic context, the ECB granted two extraordinary three-year loans (LTROs) for over €1000 billion to the banks of the Eurozone.

The ECB's extraordinary liquidity injections have cooled financial markets and dammed the crisis in the periphery. But they have also had a very positive side-effect for the German banking system. In fact, private banks of the periphery have used a large part of the liquidity received by the ECB to settle their debts to the banks of the core countries and to buy sovereign bonds issued by their own state. The inherent contradiction of these dynamics is glaring. On the one hand they have enabled the German banks to mutualise onto the whole Eurosystem their exposure to the private credit risk of the periphery; but on the other hand they have pushed the banks of PIIGS to take on the public debt of their respective governments and the associated sovereign risks, preventing any mutualisation of these risks on the whole Eurozone.

The divergence process has undergone a major reversal with the “anti-spread” shield deployed by the ECB in September 2012. In fact the deployment of the anti-spread shield with the theoretical possibility of unlimited purchases of bonds by the ECB has effectively contributed to interrupting the bearish speculation on government bonds and mitigating the collateral discrimination, stopping some of the phenomena that caused the uncontrolled growth of the spread. In addition, the concomitant influence of the abundant liquidity coming from Japanese and US monetary expansion schemes has favoured a strong demand for government bonds on the secondary markets, causing a spectacular reduction in yields. The ECB role hence had been determining to avoid the final stage of collapse of the Eurozone, but it could never be enough to ensure its definitive stabilisation.

However, the economic and financial crisis has undermined the solidity of the Euro and fed a clash of interests that averts the prospects of a full integration of the member states.

Both the European Monetary Union and the individual countries have deployed a rich and diversified set of measures to counter the crisis. Specific bodies have been established, in the form of two sovereign bail-out funds, to provide financial assistance to the distressed countries, through the disbursement of loans and the support in the placement of government bonds. In exchange for the assistance received, the peripheral countries have had to engage in severe programmes of domestic reforms, imposed by the Troika (i.e. the triad composed of the IMF, the ECB and the European Commission). At the same time, the fiscal discipline governing the budgets of EU countries has undergone major revisions through the update of the Stability and Growth Pact in late 2011 and the adoption of the treaty known as Fiscal Compact in March 2012. On the effectiveness of austerity policies, from the perspective of strengthening the European cohesion, many doubts have been cast. But this is an issue that should be discussed separately.

As of 2010, the ECB has fielded unconventional measures of monetary policy in order to contrast the credit crunch and meet its inflation target. Banks received massive liquidity injections in the form of extraordinary loans (LTROs and T-LTROs) and bonds purchasing programmes, such as the Securities Market Programme (SMP) and the European Quantitative Easing (QE).

In early 2015 the ECB launched QE on bonds issued by the public sector with the aim of countering the generalised deflationary environment and the credit crunch. However, QE has had little success in pursuing these targets: in the autumn of 2015, inflation expectations in the Eurozone were back to the levels before QE and, in early December, the ECB decided an extension of the programme to (at least) March 2017, compared the original expiry of September 2016. Several doubts arises over whether the programme will work, even in this enhanced version. A first critical point of QE is the almost complete lack of risk-sharing between the member countries (80 % of the overall purchases have to be carried on by the national central banks on the bonds issued by their respective governments)–once again, an indication that the Eurozone is a mere mosaic of states, rather than an authentic union. A further weakness of European QE is the inability to ensure that the liquidity injected will reach the real economy. The protracted crisis and the related drop in production and in the aggregate demand detonated non-performing loans (NPLs), making the disbursement of new loans difficult for banks without having to raise new capital in order to remain compliant with prudential regulations. At the same time, the predictability of the impact that QE's purchases will have on sovereign yields and prices has encouraged banks to implement low-risk profit booking strategies through the purchase and subsequent sell-off of government bonds. So, banks use cash to buy more government bonds (and make easy capital gains) and to increase their risk-free deposits at the ECB. Little or nothing reaches the real economy.

In addition to the unconventional monetary policy measures, an ambitious project of banking union is ongoing, with the major objective of breaking the intimate link between banks and sovereigns and prevent episodes of bail-out of a bank by its national government. From January 2016 a bail-in regime has entered into force for the resolution of banking crises: all risks and losses will be borne by shareholders, holders of subordinated (and may be even senior) bonds and, at the end of the waterfall, even by some corporate depositors. This regime should definitely cease state aids to banks like those that occurred in recent years in several peripheral and core countries.

Despite this broad set of extraordinary interventions, a full integration of the member countries of the Euro area has now become a long-term goal, as witnessed by the questionable management of the third Greek crisis in the summer of 2015. Aware of this situation, the book presents some proposals for concrete actions by the ECB that could stem the dissolution of the Eurozone and make a first step in the direction of definitely overcoming the perverse side-effects of the Euro, realigning the economic and financial cycles of the member countries and preventing future upsurges of the spreads.

The starting point should be a review of the ECB Statute to introduce–alongside with the inflation target–a zero-spread target. Since the outbreak of the crisis the high spreads have enabled and fuelled economic and financial dysfunctions, competitiveness gaps and paradoxical wealth transfers between the Eurozone countries. From the end of 2012 spreads have gradually deflated, but still each member state has different funding costs. Moreover, in countries that continue to have structural weaknesses any negative shock could aggravate the economic and financial conditions and increase the sovereign risk without substantial safety networks operating across the Euro area. Therefore, a reform of the ECB focused on a zero-spread target would be a powerful signal to the markets that the common intent of the member countries is to restore the classical paradigm of each common currency area: one currency, one interest rate term structure.

In line with this revised target, the book illustrates several possible ECB interventions with increasing levels of pervasiveness. Eliminating the spread means eliminating the dysfunctional aspects of the Euro that boosted the disparities between member countries. ECB purchase programmes should exempt sovereign issuers from interest payments, make a reprofiling of the public debt of the Eurozone countries (by replacing the expiring debt with long-term securities to be purchased by the central bank), and make room for interventions of (partial) debt monetisation, if necessary to restore a single interest rate curve and to intervene on the levers that influence inflation.

These measures would have multiple benefits: improving the sustainability of the public debt of the peripheral countries, discouraging the collateral discrimination and the spread intermediation, increasing the monetary base with positive side-effects both on the production and on the inflation expectations.

Obviously, a similar ECB commitment should be neither exclusive nor permanent. Rather it should find a valid counterpart in the gradual adoption of structural reforms appointed to remove the imbalances between the economic and financial cycles of the Eurozone participants, to define concrete schemes of fiscal transfers and to make feasible financing projects of the individual states through advanced solutions of debt mutualisation.

Further interventions should be undertaken to revive the real economy, overcome the credit crunch and restart investments, which are a key component of the GDP of developed countries. This could be achieved with a few revisions of tools already used by the ECB. Enforcement rules on targeted loans like the T-LTROs should be binding so that banks really do use the cash received to supply credit to the economy. A positive contribution could come also from a smart reboot of the European market of the asset-backed securities (ABS). In the autumn of 2014, the ECB launched a programme to purchase these securities that bundle bank loans, but so far it has been feeble mainly because of the stringent eligibility rules defined by the ECB. Yet this purchase programme could release the credit to the economy and support many Eurozone banks in the management of the huge stock of NPLs. With this aim, the simple inclusion of credit enhancements in the form of public guarantees provided by sovereign and/or supranational issuers could make these securities less risky and more appealing even for the ECB. A concurrent revision of the regulation on capital requirements is also advisable; in fact, the current provisions penalise too much banks that opt to disburse new loans to the economy rather than safer choices, such as buying government bonds or increasing the cash deposited at the ECB.

It is now universally acknowledged that a major cause of the outbreak and propagation of the global financial crisis was excessive risk-taking. The concealment of the risks and their improper measurement favoured the proliferation of high-risk (or even toxic) financial products in the portfolios of banks, sovereign states, local governments and savers.

All this suggests a profound revision of the financial regulation in a market-oriented direction. Financial reporting standards and prudential regulation for banks and insurance companies should embed the universal principle that moves markets: the fair pricing evaluation. This would ensure a more truthful representation of a given financial entity, reducing the risk of nasty surprises.

Also the provisions on the supply and distribution of financial products should be revised with a similar perspective. Today, risks and opportunities are explained very vaguely, at most through over-simplified and pseudo-technical solutions, as the what-if. Conversely, the correct representation of risks is fundamental in order to understand the fair value of a financial product and to avoid mispricing. An analysis on the five largest European economies reveals that mispricing has allowed net transfers of wealth among the different countries in relation to their size and to their financial position as net buyers or sellers of financial assets. This is an additional argument in favour of a prior revision of the European regulatory framework on transparency. In this regard, the book proposes the adoption of a risk-based approach that moves from a key fact: risk is always measured in terms of probabilities. In order properly to understand and compare financial products, investors need to know the fair value, the subtended chances of gaining, losing and balancing (break-even) and by how much. This information would restore investors' confidence in the financial system, prevent improper transfers of financial resources and give banks the opportunity to engage themselves profitably in an activity of restructuring the risks by applying the advanced tools offered by structured finance. In turn, this repositioning of the banks' offer would make it possible to reorient the demand for elementary products towards sovereign bonds, with positive effects in terms of maintaining the spread under control and exiting the credit crunch.

In conclusion, the author does not limit the analysis to the current situation; he describes, with rigour and clarity, many proposals to attain, in a gradual but concrete way, a real monetary union.

The main goal is definitely to close the current phase of “incomplete currency”.

We are perfectly aware of the merits and limits of the historical period we are currently living in. The completion of the monetary union cannot be attained only with the aid of the European Central Bank, but it must return to being the result of a great political project. Currently this project is still missing but we hope that it will be completed in the near future. On the completion of the European Union, of which the monetary union is only a pillar, depends our future and that of the next generation.

Romano Prodi